CE3 - Optimal Investment Strategy at Barney-Jones

At the present time, the beginning of year 1, the Barney-Jones Investment Corporation has
$100,000 to invest for the next 4 years.
There are five possible investments, labeled A through E.
The timing of cash outflows and cash inflows for these investments is somewhat irregular.
Investment A: Invest at the beginning of year 1, and for every dollar invested, there are
returns of $0.50 and $1.00 at the beginning of year 2 and 3.
Investment B: Invest at the beginning of year 2, receive returns of $0.50 and $1.00 at
the beginning of year 3 and 4.
Investment C: Invest at the beginning of year 1, receive returns of $1.20 at the
beginning of year 2.
Investment D: Invest at the beginning of year 4, receive returns of $1.90 at the
beginning of year 5.
Investment E: Invest at the beginning of year 3, receive returns of $1.50 at the
beginning of year 4.
We assume that any amounts can be invested in these strategies and that the returns are the same for
each dollar invested.
However, to create a diversified portfolio, Barney-Jones decides to limit the amount put into any
investment to $75,000.
The company wants an investment strategy that maximizes the amount of cash on hand at the
beginning of year 5.
At the beginning of any year, it can invest only cash on hand, which includes returns from
previous investments.
Any cash not investment in any year can be put in a short-term money market account that
earns 3% annually.
Objective: To develop an LP spreadsheet model that relates investment decisions to total
ending cash, and to use Solver to find the strategy that maximizes ending cash and invests no
more than a given amount in any one investment.


CE4 - Managing a Pension Fund at Armco
Example 4.7 illustrates a common situation where fixed payments are due in the future and current
funds must be allocated and invested so that their returns are sufficient to make the payments.
We place this in a pension fund context.
James Judson is the financial manager in charge of the company pension fund at Armco
Incorporated.
James knows that the fund must be sufficient to make the payments listed in the table below.

It is currently January 1, 2010 and three bonds are available for immediate purchase. The prices
and coupons for the bonds are as follows:
Bond 1: costs $980 and yields a $60 coupon in the years 2011 through 2014 and a $1060
payment on maturity in the year 2015.
Bond 2: costs $970 and yields a $65 coupon in the years 2011 through 2020 and a $1065
payment on maturity in the year 2021.
Bond 3: costs $1050 and yields a $75 coupon in the years 2011 through 2023 and a
$1075 payment on maturity in the year 2024.
James must decide how much cash to allocate to meet the initial $11,000 payment and buy
enough bonds to make future payments.
He knows that any excess cash on hand can earn an annual rate of 4% in a fixed-rate account.
How should he proceed?
Objective: To develop an LP model that relates initial allocation of money and bond purchases
to future cash availabilities, and to minimize the initialize allocation of money required to meet
all future pension fund payments.